Your Pre-Retirement Checklist
A little birdie told me that you’re thinking about retiring soon. Congratulations! It’s a big milestone and one that I’m glad you are researching.
Before we go any further, decide if you’d rather read an article or listen to a podcast episode on retirement.
You may be asking yourself, “How much do I need to retire?” And I wish I could tell you that once you have a certain dollar amount saved, you’ll have 100% assurance that your retirement lifestyle will be comfortable. But I can’t say that for two reasons:
There is no magic "one size fits all" retirement savings amount.
There are several factors that influence your desired savings target: your age, marital status, how many children you have, how much you currently spend (and anticipate spending during retirement), health status, family longevity, legacy goals, the level of market risk you feel comfortable taking, current and future tax rates, inflation, etc.
A single schoolteacher who has lived frugally her entire life and has a pension will probably need less in savings than a married couple with three grown kids who currently spend $10,000 or more monthly. Retirement planning for married couples demands some different considerations than for single people, especially when children are involved.
When Christians think about how to prepare for retirement, they must also consider how to be good stewards of the resources entrusted to them.
Earning or investing money is not inherently bad. Rather, money is a tool that enables us to accomplish goals and be generous. Nonetheless, modern society encourages us to earn more and consume more. Christ-followers who fall into the trap of secular desires can easily turn money into an idol – thinking they have complete control over their financial destiny.
There’s a delicate balance between financially providing for our families and generously sharing resources with other families in need. At WorthyNest®, we take great pride in helping clients draw this line.
Your family’s journey to financial independence will look different from your neighbors and friends. However, there are commonalities on the path to retirement that should be considered well before you resign or exit the business. In this post, I’ll be offering seven items to include on your pre-retirement checklist.
#1: Current Savings Rate
What is your savings rate? Are you living paycheck-to-paycheck or do you budget enough to maximize any workplace retirement plans? Do you have liquid cash or brokerage savings outside of the 401(k), 403(b) or IRA that could be tapped in the event of an emergency?
Those who are most financially prepared for retirement are already in savings mode. They never spend more than they earn and typically pay credit card balances off in full each month. They are contributing regularly to investment accounts that will grow over time.
If asked to describe themselves, they may say “responsible” or “conscientious.” Perhaps “frugal.” They view a budget as freeing rather than restricting because it gives them direction on appropriate savings goals.
#2: Age and Health Status
The average U.S. life expectancy is 76.6 years in 2021. Our financial planning program assumes a life expectancy of age 95 for females and age 90 for males because females typically live longer than males.
Thus, if you’re a woman retiring at the “traditional” retirement age of 65, we look at the probability of financial success for thirty years beyond retirement.
What if you live to age 100? Or 110? With technological advances, medical research and development are exploding. Awareness of how our diets and lifestyles affect health is also growing. With these trends, average life expectancy will likely increase over the next few decades.
It would be wise to take the trend toward longer life expectancy into consideration as you plan.
Those who have their sights set on retiring prior to age 65 may have to model out 40 or 50 years into the future, depending on the level of aggressiveness of the early retirement goal.
Current health status and family longevity also impact these retirement planning assumptions. A 55-year-old man in excellent physical health whose parents are both living should have a longer planning horizon than someone in poor health whose parents passed away young.
#3: Identity Outside of Work
This is a very important item that should be on your pre-retirement checklist. When you are retired, how will you spend your days? Are you partaking in hobbies now that will be enriching when you have more time to dedicate to them? Do you actively volunteer at charitable organizations that are meaningful to you and your family?
Retirees who struggle the most in the early days of retirement are those whose identity is formed purely from work. When paid full-time work is no longer an option, your sense of accomplishment may dwindle. You could become depressed if you don’t have a higher calling or purpose. Explore your identity outside of work well in advance of your retirement date.
Catholics have a beautiful tradition of the corporal works of mercy. There are seven of them:
Feed the hungry
Give drink to the thirsty
Shelter the homeless
Visit the sick
Visit the prisoners
Bury the dead
Give alms to the poor
While it is entirely possible to do these acts of mercy at some level while working full-time, retirees have much more time to be able to volunteer and participate in ministry.
Many retirees find meaning and purpose by volunteering at their local food bank, homeless shelter, or other charitable organization. Grief ministry and prison ministry are also options. These are just a small sampling of the possibilities for service during your retirement years.
Pray and discern how God is calling you to use your retirement. I’m sure he has some ideas about how to spend your time and feel fulfilled.
#4: Health Insurance
Medicare is ideal for retirees aged 65 and older or those under age 65 who are disabled. Both Medicare Parts A and B are offered by the federal government, but they may not be enough if you frequently see the doctor and have medical procedures.
Private Medicare insurance such as Medigap plans, Medicare Part D, or Medicare Advantage can be secured for an extra cost and usually supplement Parts A and B.
Financial Independence, Retire Early (FIRE) is a movement gaining a lot of momentum. It’s aptly named because you amass enough financial assets to retire prior to age 65. As explained above, Medicare only applies to healthy adults age 65 and older. What kind of medical coverage will you have prior to age 65?
Some early retirees turn to Consolidated Omnibus Budget Reconciliation Act (COBRA), which gives workers the right to continue benefits provided by their group health plan for limited periods of time – typically up to 18 months - after separation from service.
This option may be less appealing since not all employers offer COBRA. Furthermore, COBRA premiums can be costly.
You may instead turn to a Marketplace plan available at Healthcare.gov, which provides a plan comparison tool for private medical insurance. You could qualify for tax credits if your household income is low enough.
A healthcare-sharing plan may be another viable substitute if your family does not have pre-existing medical conditions and is willing to forgo true insurance in exchange for lower medical premiums (aka “monthly share”). This option can also be a good way to express Christian values. I wrote about my experience with MediShare during a brief stint in Spain, which you can check out if you’d like to know more about healthcare-sharing plans.
#5: Long-Term Care Insurance
According to the American Association for Long-Term Care Insurance 2021 statistics, semi-private nursing home expenses average $7,900 monthly. Assisted living facilities average $5,200 monthly for care.
Now is the time to explore long-term care policies if you’re between the ages of 55 and 60 and you’re concerned about end-of-life costs depleting all retirement accounts.
Waiting beyond age 60 to secure a policy means you’ll pay far more money for the same level of coverage.
Most of our clients prefer to have a hybrid long-term care and life insurance policy that will leave a small death benefit if long-term care claims are less than the policy value. Married couples can have a shared pot of funds to pay for long-term care expenses during both of their lives – while preserving the value of retirement accounts. A small premium discount applies.
As with any insurance product, it is important to understand the policy tradeoffs and have an objective advisor whose compensation is not tied to the policy recommendation.
As fee-only fiduciary advisors, we always act in our client’s best interest and refer clients to independent insurance agents so we are not financially benefiting when our clients select an insurance policy.
#6: Social Security
The timing of when to claim Social Security benefits is perhaps THE most discussed topic for pre-retirees. It may even be #1 on most people’s pre-retirement checklist.
Imagine this scenario: you run into a friend at a party who recently retired and hear her saying how great it is that she started getting Social Security income at age 62 when she retired early. You start thinking about how much you’d like to retire early. But is it really the best option?
Starting Social Security benefits prior to your full retirement age (FRA) is often not ideal because you take a permanent benefit decrease.
Suppose you were born in 1960, so your FRA is age 67. If you elect to take Social Security benefits early at age 62, a $1,000 monthly retirement benefit would be reduced to $700. That’s a permanent $300, or 30%, monthly benefit reduction.
There may be other assets in your investment portfolio to use for lifestyle expenditures between ages 62 and 67, thereby allowing you to wait until age 67 to receive the normal benefit.
Furthermore, waiting beyond your FRA can accrue an even larger Social Security benefit.
On the opposite spectrum, suppose you delay Social Security benefits as long as possible to age 70 but unexpectedly are diagnosed with a terminal illness only a few years later. Would you regret not taking the benefits sooner?
Health status, family longevity, marital status, saving account balances, and pension income are important factors in your Social Security timing decision. It’s crucial to have an advisor who is experienced in these decisions and can model the different scenarios for you – several years into the future.
#7: Investment Mix
Asset allocation represents the mix of equities relative to bonds (also known as fixed income). Equities offer a higher potential return in exchange for a higher level of risk. Bonds are perceived as safer investments because they aren’t tied to stock market fluctuations. Rather, bond prices move in relation to interest rate changes. As the interest rate rises, bond values decrease.
In rising interest rate or inflationary environment, the value of bonds can fall – making equities more attractive. But moving your long-term investment mix to increase equity exposure isn’t advised if you are within five years of retirement. You still want some bond exposure in case we experience a recession and you need to turn investments into cash quickly.
Having an experienced investment advisor makes a world of difference today and in the future. Not only will this person help you identify an appropriate asset allocation or investment mix, but she’ll also be a voice of reason when the stock market declines and your emotions urge you to sell.
For Christians, it can be challenging to find investments that align with spiritual values.
We take values alignment to the next level by introducing investment positions that exclude companies with unethical business practices and embrace companies that are creating positive social change in the world. If this intrigues you, you can read my post about how to invest with your values.
When it comes to retirement, there are also legacy questions:
What kind of mark would you like to leave on the world?
Are there any charitable organizations you’d like to support financially or through volunteer efforts?
Would you like to partially fund your grandchildren’s private K-12 or college education expenses?
Your answers to these questions will determine how you invest and manage your funds leading up to and during retirement.
Your Next Step for Retirement Planning
Financial independence, a time when you no longer have to work for pay, is such a terrific milestone. However, as you can see from this guide, there are several items to ponder before you officially retire or exit your business.
It would be wonderful to discuss this resource with your spouse if married. But that’s only a starting point. You may find that you and your significant other have differing goals. Or maybe you are single and need someone trustworthy to openly listen to your concerns as you prepare for this next phase of life.
Either way, know that we are here to serve you. We guide parents through important financial decisions using a values-based approach. Contact us to explore a one-on-one relationship.